Ever since the world fell prey to the mullahs of the free market in the 1980s, no amount of real world evidence has managed dispel one key tenet of their economic faith. Namely, the idea that if you cut income taxes and taxes on small business, a wave of individual enterprise and entrepreneurial energy will thus be unleashed, profits will rise and – hey bingo! – the tax cuts will soon be paying for themselves via all that extra economic activity that this virtuous cycle will have set in train.
Ahem. One small problem: the formula doesn’t seem to work. Undaunted, Donald Trump appears intent on uncorking this magic potion yet again – despite the previous tax cutting disasters initiated by George W. Bush and earlier, by Ronald Reagan. (Reagan not only backpedaled on his tax cuts after their disastrous impact became obvious, but the rate of increase in government sending to GDP on his watch was actually double the rate of increase under Ford/Carter. Somehow, the Reagan myth endures.)
Basically… what tends to happen is that deficits soar, and social services get cut in the subsequent scramble to make up for the missing revenue. You could say that the combo of income tax cuts and corporate tax cuts are the best example of Gore Vidal’s old maxim that the US is very, very fond of prescribing socialism for the rich, and capitalism for the poor.
The really compelling modern evidence that the magic potion doesn’t work is the state of Kansas under the economic policies of its far right, tax-cutting governor, Sam Brownback. Bloomberg News has just updated how badly things are faring:
Like President-elect Trump, who said on the campaign trail that slashing taxes would jump-start growth, Sam Brownback in 2012 said steep cuts to personal income and small-business taxes in the Midwest state would provide the economy a“shot of adrenaline.” What followed wasn’t the promised jolt. The shortfall in revenue has instead forced the government to curtail spending on everything from health care to higher education…
Brownback’s experiment offers a cautionary tale for Trump, who has placed tax reform as a central part of his strategy to more than double the pace of economic growth and add millions of well-paying jobs to the labor force.
Brownback has tried to staunch the flood of bad news from his experiment in Tea Party economics by hiding the quarterly updates on Kansas’ economic performance. Check the indices in the last report before the cloak came down in 2015 though, and you could already see that Kansas lagged badly in comparisons with the region, and with the US a whole, two years after the tax cut magic was unleashed.
Two subsequent leaked Kansas governor’s reports referred to in this recent LA Times update contain no better news.
They painted a “doom and gloom scenario” in which the gross state product had declined from 2014 through 2015, and that growth in personal income, nonfarm employment and private industry wages all trailed the region and the country as a whole. Sales tax collections were up, but that’s because Brownback enacted two sales tax increases to compensate for his other tax cuts. The general effect was to burden the middle class and poor with costs that wealthier Kansans escape.
Why should we care? For two main reasons. One, Trump is about to re-inflict these loony ideas on a US economy that has finally been hauled out of the GFC that was triggered by the last madcap round of banking and financial de-regulation, and by a tax cutting regime under George W. Bush that had caused the housing bubble to explode. Secondly, and more importantly, New Zealand is about to enter an election campaign that’s expected to be dominated by a debate on the merits of tax cuts vs spending on social services.
On all the available evidence, the benefits from tax cuts are (a) ideological and (b) political. They do not make economic sense, and they are socially irresponsible. The tax cuts are likely to fuel the housing bubble, and will cause a spending spree that will make it imperative for the Reserve Bank to hike interest rates in order to counter this tax cut fuelled inflationary spike. In other words, any gains from the tax cuts will be largely illusory for all but the most wealthy among us, and they will drain away the revenue that was needed (b) to counter our existing social deficits in health, housing and education, or (b) to foster sustainable economic development. Yet, as the recent LA Times report on Kansas indicates, policy makers are addicted to tax cuts:
The Kansas experience is important because the notion that dramatic tax cuts pay for themselves by spurring economic growth still unaccountably has an allure for conservative policymakers, despite overwhelming evidence to the contrary. ….The tax package Brownback enacted in 2012 cut the top personal income tax rates sharply. The rate on income under $30,000 was pared to 3% from 3.5%. Pass-through business income was made fully tax-exempt. The law increased the standard deduction, but also eliminated several tax credits that assisted the poor.
In follow-on changes the next year, the top income tax rate was cut further. But other cuts were reversed, effectively raising taxes for the middle class and working class. In all, as was documented by the Washington-based Center for Budget and Policy Priorities, the changes cut the taxes of the wealthiest 1% of Kansans by 2.2% and raised them for the poorest 20% by 1.3%.
It should go without saying that far from paying for themselves, these cuts have blown a huge and growing hole in the state budget. Income tax collections are more than 22% below their pre-cut levels. Schools, universities and road repairs all have taken a hit in spending…The Kansas economy has lagged behind the U.S. and neighboring Missouri for years…..California, has the reputation for being a spendthrift but has gotten its fiscal house in order by raising taxes.
Keep Kansas in mind this year when our politicians begin to try to sell the notion that tax cuts are a responsible form of economic management. They’re not. They’re a bag of sweets, a bribe to win your vote. Beyond the sugar hit, they’ll do nothing to fix the problems facing the country, and will also do nothing to make this country safer or more prosperous for your kids.
Wrong Road Again
And here from the mid to late 1970s – which was about when those Treasury rebels were coming under the sway of Milton Friedman – is Crystal Gayle, singing her heart out about the allure of tax cuts, even when you know they’re so very, very wrong.